An Unlikely Success Story

The year is 1865. A young Mining Engineer decides to set up a paper mill in a small town in Finland. He finds some success with paper but his aspirations don’t stop at that. After some time the company decides to get into rubber production. Some decades later, they are making cables and they start venturing into the young electronics business. It would take them another 60 years to start becoming famous but when they do, they will be forever known for one thing. Not electronics, not rubber, not cables and most definitely not paper.

The company that the young mining engineer started as a paper mill was Nokia. Although Nokia today is no longer a powerful force to contend with, they are a remarkable example of how you could start a business with one idea and somehow figure out a way to be successful in a completely different business if you persist long enough.

The subtle art of running multiple businesses at the same time

Saketh Exim is not Nokia and at no point in this story, are we suggesting such a stupid thing. But it is in fact doing something very similar. Okay, maybe not that similar but let us explain. Saketh Exim manufactures engineering products, (metal and base metal) products like bolts, clamps, nuts and hangers etc. Its product portfolio also includes different types of bathroom accessories, bathroom pipes, fittings and sanitary wares. It has 3 manufacturing plants to meet its outstanding demand and despite not having splendid profit margins, they have been consistently growing their revenue and so the story isn’t all that bad, at least for now.

But then you find out the company is also into trading textile products and almost 40% of their revenue comes from selling cloth. They sell fabric, fancy shirting and finished fabric. Based on the orders they receive, they place the requirement with their suppliers and make the final product available to their Customers.

Now, there is nothing inherently wrong in running two very different businesses at the same time. We have already spoken about how Nokia in the past has found remarkable success doing just that. But the norm for successful companies is to usually gain a foothold in one particular business and then expand into new businesses. There is always a primary business focus and for Saketh Exim we are not quite sure what that is. After days of deliberation we still can’t figure out what Saketh Exim plans to do moving forward ; Textiles or Steel? or Both?

The company's version

"A principal component of our strategy is to continue to grow by expanding the size and geographical scope of our business, as well as the development of our new products portfolio"

You can introduce new products in the steel division, but what about the trading business. Does this mean there is going to be a shift in strategy and the company would sell more of its steel products?

There is some evidence to suggest that the company has in fact chosen to shift its focus away from textiles in the recent past. The trading business contributed to about 60% of their revenue in 2016, today it only contributes about 40%

The company also maintains that due to the nature of competition, within the organised and the unorganised steel/textile industry it has had to focus on exports.

So it seems that the company is gearing towards selling more of its steel products and exporting them outside of India but we cant be sure. Both decisions are perhaps taken with the a view of improving their poor profit margins

Is it well poised to do so ?

The company has a debt of about 20 Crores. This has accumulated largely because the company hasn’t been able to manage to generate enough cash from its operations and has had to borrow money from banks to continue its operations.

Increasing trade receivables?

The company also has high receivables; about 21 Crores in total and they have been increasing disproportionately the past couple years

The company is betting on the fact that steel will see a revival and that by increasing its product offerings it can grow its top and bottom line.

Where’s the money going ?

Mr, Piyush Patel, a member of the promoter group wants to sell some of his stake for about 1.7 Crores

The company also wants to raise a good portion of the money to fund its working capital requirements, about 7.3 Crores in total

Finally, they want to spend about 3 lacs in General Corporate affairs

At a price of Rs. 69, the company wants to raise about 9 Crores in total by diluting 27% of their stake. At this price, the PE translates to about 32. We don’t know what’s a good company to compare this with, but I think we can say with some confidence that this issue is in fact pricey, very very pricey.

However, We wish Exim Saketh the best of luck in its future endeavour.

HDFC Asset Management Co.

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